Commerzbank’s FX research notes USD/CNY trading around 6.77, slightly lower on the day. The combination of weaker Chinese growth and expectations of further policy easing is seen generating a modest depreciation bias for the Yuan, though authorities are expected to cap volatility via the daily fixing mechanism.

Policy easing weighs but fixing caps swings

"China's State Council committed to meeting the full-year growth target after Q2 GDP came in at 4.3% yoy, missing the official 4.5%-5.0% target range. Premier Li Qiang chaired the State Council executive meeting, with the readout calling for fiscal funds to be deployed with maximum efficiency and for policy implementation to be accelerated through the remainder of the year."

"The State Council meeting is widely read as a preparatory signal ahead of the July Politburo meeting, expected to be held in the final week of July. It is set to define the macroeconomic policy stance for H2."

"The Politburo is expected to signal an easing rhetoric and accelerate implementation of already-planned demand-side measures, while maintaining the strategic focus on high-tech sectors and key supply chains. With local governments nearing completion of their debt-swapping programme at around 94% of the CNY6trn allowance, local governments are expected to deploy more growth-supporting investment in H2."

"In FX, USD/CNY was slightly lower by 10 pips to 6.77 and offshore USD/CNH was little changed at 6.77 yesterday. The combination of a growth shortfall and prospects of further policy easing is leading to a slight depreciation bias for CNY. However, PBoC is expected to limit excessive CNY volatility through its daily fixing mechanism."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)